N JAIVEER REDDY ,HYDERABAD vs. ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(1), HYDERABAD

Per Bench:

The above batch of 4 appeals filed by the respective assessees are directed against the separate orders dated 27.12.2019 passed u/s. 263 of the I.T.Act, 1961 by the learned Pr.CIT Central, Hyderabad relating to A.Y.2015-16.

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ITA No.619/Hyd/2019 – Shri K. Vijaya Bhaskar Reddy

2.1 Fact of the case, in brief, are that the assessee is an individual and one of the Directors in M/s. Ashoka Developers & Builders Ltd (ADBL) which is engaged in the business of construction of residential apartments and commercial space. A search & seizure operation was conducted in the group case of ADBL on 18.02.2016 wherein the assessee, being director of the company was also covered. Subsequently, the assessee filed his return of income for the A.Y 2015-16 on 30.09.2016 in response to notice u/s 153A of the I.T. Act 1961 declaring total income at Rs.51,74,240/-. The Assessing Officer completed the assessment u/s 143(3) r.w.s. 153A of the I.T. Act 1961 on 31.3.2017 for the A.Y 2015-16 accepting the income returned.

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3.1 Since the assessment was completed without taking into

account the above mentioned fact, the learned PCIT was of the

opinion that the order passed by the Assessing Officer u/s 143(3)

r.w.s. 153A of the Act was erroneous in so far as it was prejudicial

to the interest of the Revenue. He, therefore, issued a show cause

notice u/s 263 of the I.T. Act, 1961 asking the assessee to explain

as to why the order passed by the Assessing Officer u/s 143(3)

r.w.s. 153A should not be revised. In response to the same, the

assessee company filed a detailed reply objecting the initiation of

proceedings u/s. 263 of the I.T.Act, 1961

3.2 During the proceedings before the PCIT, the assessee

submitted that the valuation of share is correct and there is no

infirmity in the valuation and therefore, invoking the provisions of

section 263 of the I.T. is not applicable. It was argued that the

initiation of section 153A of the I.T. Act, 1961 itself is not legally

correct.

3.3 However, the learned PCIT was not satisfied with the

arguments advanced by the assessee. So far as the argument of

the assessee that the valuation of shares is correct as per

prescribed rules is concerned, he noted that in the instant case,

the property (equity shares of CBDL) was received by the assessee

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on 9.4.2014, therefore, the value of shares on 9.4.2014 should

have been adopted for the purpose of determining the Fair Market

Value (FMV) of shares. However, the assessee in the instant case

has adopted the value of shares as per the audited balance sheet

as on 31.3.2013 considering that the balance sheet as on

31.3.2014 was not drawn up and audited by the auditor of the

company u/s 224 of the Companies Act, 1956 following the rule

11U(b)(i) of the I.T. Rules. He observed that the method prescribed

in rule 11U(b)(i) of the I.T. Rules is applicable for the purpose of

Sub Rule (2) of rule 11AA which pertains to valuation of unquoted

equity shares for the purpose of 56(2)(viib) of the IT Act,1961

whereas this case squarely falls under Rule 11U(b)(ii) of the IT

Rules as per which in any other case the balance sheet of such

company as drawn up on the valuation date which has been

audited by the auditors appointed under section 224 of the

Companies Act,1956. Accordingly, the assessee should have either

appointed the auditor u/s 224 of the Companies Act, 1956 and

got the accounts audited as on the valuation date i.e as on

09.04.2014 or adopted the balance sheet as on immediate

preceding year i.e. 31.03.2014 Since, the auditor was not

appointed by the assessee to get the accounts audited as on the

valuation date, the only option left with the assessee was to adopt

the balance sheet as on 31.03.2014. He noted that the FMV

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arrives @Rs 51/per share after following the balance sheet as on

31.03.2014 and the same value i.e.(@Rs. 5l/- per share) was

adopted by the seller i.e, M/s ADBL to arrive at the capital gain

tax for the A.Y. 2015-16. Accordingly, the difference amounting to

Rs. 16/- per share was to be assessed in the hands of the

assessee as envisaged in section 56(2)(vii)(c)(ii) of the Income Tax

Act, 1961. Hence, the objection raised by the assessee with regard

to valuation of share is not correct and hence denied.

3.4 So far as the argument of the assessee that the notice

u/s 153A is invalid in absence of any incriminating material is

concerned, the PCIT observed that the said provisions have been

inserted by the Finance Act, 2017 which is effective from 1.4.2017

whereas the case of the assessee is A.Y 2015-16. Therefore, the

newly inserted provisions are not applicable to the facts of the

present case. Distinguishing the various decisions cited before him,

the learned PCIT held that the assessment order passed by the

Assessing Officer is erroneous in so far as it is prejudicial to the

interest of the Revenue as envisaged in section 263 of the I.T. Act.

He accordingly set aside the order passed by the Assessing Officer

with a direction to redo the same afresh taking into a/c the

provisions of section 56(2)(viib) of the IT Act,1961 after providing an

opportunity of being heard to the assessee.

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disclosed the difference in rate amounting to Rs. 16/- per share in

the company's hands and paid taxes which was brought to the

notice of the AO and the same was accepted by the AO. However,

on verification of the assessment record, he noted that the

Assessing Officer has not examined the applicability of provisions

of section 56(2)(vii )(c)(ii) during the assessment proceedings.

Hence, there is no question of accepting the claim of the assessee

with regard to the payment of taxes by the company M/s ADBL.

provisions of section 263 of the Act as there is no loss to the

Revenue is concerned, he noted that the explanation 2 of sub

section l of section 263 clearly specifies that if the order is passed

without making inquiries or verification which should have been

made or the order is passed allowing any relief without inquiring

into the claim, the order passed by the Assessing Officer shall be

deemed to be erroneous in so far as it is prejudicial to the interest

of the revenue. In the instant case, it is clearly evident from the

verification of record that the AO has not enquired about the FMV

of the share purchased by the assessee.

56(2)(vii)(c)(ii) do not stipulate that if the taxes are already paid by Page 6 of 26

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the seller, the purchaser need not pay the taxes. In other words,

the said section only states about the treatment of difference in

FMV for taxation in the hands of the purchaser and the same is

nothing to do with the seller Hence, the assessee' s argument that

there is no loss of revenue to the Government because the amount

has already been brought to tax in the hands of the company has

no logic and accordingly, the initiation of proceedings u/s 263 of

the Income Tax Act, 1961 stands valid. In view of the above, he

set aside the order passed by the AO and directed him to decide

the issue afresh taking into account the provisions of section

56(2)(vii)(c)(ii) of the I.T.Act after providing due opportunity of

being heard to the assessee.

“1. The order of the Hon'ble Pr.CIT is erroneous in law as well as facts of the case

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total income, in the course of post search enquiry proceedings, in which the assessee and other co-shares were shareholders. 5. The Hon'ble Pr. CIT ought to have observed that there was no revenue loss as the relevant amount was already brought to tax in the case of M/s. Ashoka Developers & Builders Limited instead of individual shareholders.

challenged the order of the learned PCIT in invoking the jurisdiction

u/s 263 of the I.T. Act. He submitted that on the date of search on

18.2.2016, no incriminating materials were found. Therefore, in

absence of any incriminating material found during the course of

search, the learned PCIT was not justified in assuming jurisdiction

u/s 263 of the I.T. Act.

of argument submitted that the assessee has disclosed the

investment in accordance with the purchase of shares in the return

of income filed u/s 139 of the I.T. Act. The shares, in question,

were transferred on 9.4.2014 and the assessee has adopted the

shares @ Rs.35/- per share which is as per the provisions of

section 11 and 11UA of the I.T. Rules. Referring to the provisions of

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section 11UA of the I.T. Rules, 1961, the learned Counsel for the

assessee submitted that as per the said Rule, the Fair Market

Value (FMV) of unquoted equity shares shall be the value on the

valuation date of such unquoted equity shares as determined in the

manner prescribed therein.

of Rule 11UA clearly brings out that the shares are to be valued in

accordance with the last audited balance sheet which was as on

31.3.2013 relevant to the financial year 2012-13. Since the balance

sheet for A.Y 2013-14 was not drawn up as on 9.4.2014, the shares

were valued as per the last audited balance sheet which was

relevant to the financial year 2012-13, he submitted that the

valuation of the shares @ Rs.35/- per share was on the basis of the

last audited balance sheet on 31.3.2013 which is not disputed. On

the contrary, the computation of value of shares of M/s. Cyber City

Developers & Builders (P) Ltd @ 51/- per share as on 31.3.2014,

which was not on the basis of audited accounts at Rs.51/- is not in

accordance with the statutory provisions and Rules. He accordingly

submitted that in accordance with the provisions of valuation as

laid down in Rule 11UA of Income Tax Rules, 1961 which was

Asset Backing Method i.e.(Assets-Liabilities:-No. of shares).

Therefore, the adoption of value of shares at Rs.51/- by the learned

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PCIT is totally contrary to the statutory provisions. Therefore, the

order passed by the learned PCIT u/s 263 has no legs to stand.

plank of his argument submitted that since in the case of the

assessee as well as remaining 3 assessees, the original

assessments were not taken up for scrutiny and the A.Y involved

being A.Y 2015-16, the time limit for issuance of notice u/s 143(2)

expired on 30.09.2015 and the entire proceedings stood terminated

on 30.09.2015.

Haryana High Court in the case of CIT vs. Vippin Khanna reported

in 255 ITR 220 and the CBDT Circular No.549 of 31/10/1989

reported in 182 ITR (ST)001, he submitted that the assessment

stood terminated and no proceedings were pending as on

30.09.2015. He submitted that when the entire assessment were

subject to search u/s 132 on 18.2.2016 and no proceedings were

pending in respect of the above mentioned assessees, the question

of making addition u/s 153A does not arise in absence of any

incriminating material found during the course of search.

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Tribunal in the case of Anjali Jewellers vs. Pr.CIT reported in (2021)

92 ITR TRIB.35 (ITAT Kolkata), he submitted that when no

incriminating material was found during the course of search, the

PCIT fell into error in stating that the addition could be made u/s

153A of the Act and in a proceeding u/s 143(3) r.w.s. 153A a

concluded assessment could not be taken up or in short settled

issues cannot be unsettled unless there was incriminating material.

in the case of Spectra Shares & Scrips (P) Ltd vs. CIT reported in

354 ITR 35, he submitted that the Hon'ble High Court in the said

decision has held that the Assessing Officer in the assessment

order is not required to give detailed reasons and once it is clear

that there was application of mind by an enquiry merely because

the Commissioner entertains a different opinion in matter, cannot

invoke his powers u/s 263 of the Act.

in the case of ACIT vs. Shri KCKA Gupra, copy of which is placed at

page No.13 of the Paper Book filed, he submitted that the Hon'ble

High Court in the said decision has held that where two views are

possible, the Commissioner cannot revise the assessment order

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merely because he does not agree with the view taken by the

Assessing Officer.

seized material found during the course of search drew the

attention of the Bench to the same and submitted that the

Department during the course of search has seized the extract of

the resolution passed at the extra-ordinary general meeting held on

27.3.2014 and the explanatory statement pursuant to section

102(1) of the Companies Act, 1913. Referring to the said seized

material, he submitted that the rate per share has been mentioned

at Rs.35/- per share.

Tribunal in the case of Sadhvi Securities (P.) Ltd. vs. Assistant

Commissioner of Income Tax reported in 109 Taxmann.com 245,

he submitted that the Tribunal in the said decision has held that

where the assessee issued equity shares (unquoted) on 31.3.2014,

the valuation date of unquoted shares was also 31.3.2014 and if

the balance sheet was not drawn up by the Auditor on 31.3.2014

the valuation of assets and liabilities as on 31.03.2013 should have

been adopted.

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Tribunal in the case of Medplus Health Services (P) Ltd vs. Income

Tax Officer reported in (2016)68 taxmann.com 29, he submitted

that the Tribunal in the said decision has held that where a method

has been prescribed by the Legislature, that method alone shall be

followed for computation of the fair market value.

Court in the case of Gopaldas Bhadruka reported in 346 ITR 106 is

not applicable to the fact of the present case.

Reddy recorded on 8.3.2016 is concerned, he submitted that the

statement recorded u/s 132(4) is not an incriminating material. He

accordingly submitted that the order passed by the learned PCIT by

invoking the provisions of section 263 of the I.T. Act setting aside

the order passed by the Assessing Officer being not in accordance

with law should be set aside and the grounds raised by the

assessee should be allowed.

order of the learned PCIT. He submitted that the Assessing Officer

in the instant case had not verified the applicability of provisions of

section 56(2)(vii)(c)(ii) of the I.T. Act while finalising the assessment.

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Further, the statement of the assessee Mr. Vijaya Bhaskar Reddy,

who is the director of the M/s. Cyber City Builders & Developers (P)

Ltd, recorded during the course of search and thereafter including

the affidavit on 1.6.2016 by Shri N. Jaiveer Reddy before the DDIT

(Inv.) were not considered by the Assessing Officer.

the case of E.N. Gopakumar vs. CIT (Central) reported in (2016)

390 ITR 131 (Kerala), he submitted that the assessment

proceedings generated by issuance of a notice u/s 153A(1)(a) can

be concluded against the interest of the assessee including making

addition even without any incriminating material being available

against the assessee in search u/s 132 on the basis of which notice

was issued u/s 153A(1)(a) of the I.T. Act. He accordingly submitted

that since the Assessing Officer in the instant case has not

considered the adoption of the fair market value at Rs.51/-,

therefore, the order passed by the Assessing Officer has become

erroneous as well as prejudicial to the interest of the Revenue and

therefore, the learned PCIT was fully justified in assuming

jurisdiction u/s 263 of the I.T. Act.

submitted that after the above decision in case of Shri

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E.N.Gopakumar, the full Bench of the Kerala High Court in the

case of CIT vs. C.N.Ravi vide order dated 16.10.2018 has taken a

totally different view. Therefore, the decision in the case of Shri

E.N. Gopakumar no longer applies. He also relied on the decision

of the Hon'ble A.P High Court in the case of Sri Ramdas Motor

Transport Ltd. vs Karedla Suryanarayana And Ors. on 18 October,

2001, Reported in(2002) 110 CompCas 193 AP. He accordingly

submitted that the order passed by the learned PCIT being not in

accordance with law, should be set aside and the grounds raised

by the assessee should be allowed.

sides, perused the orders of the AO and the learned PCIT and the

paper book filed on behalf of the assessee. We have also considered

the various decisions cited before us by both sides. We find the AO

in the instant case completed the assessment u/s 143(3) r.w.s.

153A of the I.T. Act 1961 on 31.3.2017 accepting the income

declared at Rs.51,74,240/-. We find the learned PCIT assumed

jurisdiction u/s 263 of the I.T. Act on the ground that the assessee,

during the year under consideration, has purchased 5,15,603

equity shares of Cybercity Builders & Developers Ltd from M/s.

Ashoka Developers & Builders Ltd @ Rs.35/- per share whereas the

value per share adopted by the seller i.e. ADBL was at Rs.51/- per

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share. Therefore, the provisions of section 56(2)(vii)(c)(ii) of the I.T.

Act 1961 applies and the difference amount of Rs.16/- per share

which should have been assessed in the hands of the assessee,

being the purchaser was not properly verified by the Assessing

Officer. According to the learned PCIT, since the equity shares of

CBDL were received by the assessee on 9.4.2014, therefore, the

value of shares as on 9.4.2014 should have been adopted for the

purchase of shares determining the fair market value. However, the

assessee in the instant case has adopted the value of shares as per

audited balance sheet as on 31.3.2013 considering that the balance

sheet as on 31.3.2014 was not drawn up and audited by the

Auditor of the company appointed u/s 224 of the I.T. Act.

According to him, since the Assessing Officer has passed the order

without making any enquiry which should have been made or the

order is passed allowing a relief without enquiry, the order passed

by the Assessing Officer is erroneous and prejudicial to the interest

of the Revenue and therefore, he set aside the order to the file of

the Assessing Officer with a direction to redo the same afresh.

24.1 It is the submission of the learned Counsel for the assessee

that no incriminating material was found during the course of

search and therefore, the learned PCIT could not have invoked the

jurisdiction u/s 263 of the I.T. Act. Further, the assessee has

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disclosed the entire amount of purchase of shares in the balance

sheet filed along with the return of income and the provisions of

section 11UA are applicable to the facts of the present case

according to which the shares have to be valued in accordance

with the last audited balance sheet which is in the instant case is

31.03.2013 as no balance sheet was drawn up as on 09.04.2014 or

31.03.2014. Therefore, the learned PCIT was not justified in

invoking the provisions of section 263 of the I. T. Act.

Counsel for the assessee. There is no dispute to the fact that the

assessee in the impugned assessment year has purchased 5,15,603

equity shares of CBDL from ABDL @ Rs.35/- per share. The

assessee has disclosed the investment in accordance with the

purchase of shares in the return of income filed before the date of

search that took place on 18.2.2016. The return of income

originally filed u/s 139 of the I.T. Act as well as the return filed u/s

153A of the Act have been accepted.

1961 read as under:

“(vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009 but before the 1st day of April, 2017, (any sum of money, without consideration, the aggregate value of which exceeds fifty

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thousand rupees, the whole of the aggregate value of such sum; (b) any immovable property,- without consideration, the stamp duty value of which exceeds fifty thousand the rupees, stamp duty value of such property; (i for a consideration which is less than the stamp duty value of the property by amount an exceeding fifty thousand rupees, the stamp duty value of such property exceeds such consideration: as Provided that where the date of the agreement fixing the amount oi consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of the agreement may be taken for the purposes of this sub-clause:

Provided further that the said proviso shall apply only in case where the amount of consideration referred to therein, or a part thereof, has been paid cash on or before the date of the agreement for the transfer of such immovable property;

(c) any property, other than immovable property

(i) Without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market Value of such property (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding Fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:

Provided that where the stamp duty value of immovable property as referred to in sub-clause (b) is disputed by the assessee on grounds mentioned in sub-section(2) of section 50C, the Assessing Office may refer the valuation of such property to a Valuation OII1cer, and the provisions of section SOC and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of sub-clause (b) as they apply for valuation of capital asset under those sections.

Provided further that this clause shall not apply to any sum of money or any property received-

(a) from any relative; or (b) on the occasion of the marriage of the individual; or (c) under a will or by way of inheritance; or (d) in contemplation of death of the payer or donor, as the case may be; or (e) from any local authority as defined in the Explanation to clause (20) of section 10; or (f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or (g) from any trust or institution registered under 6section 12AA or section 12AB); or (h) by way of transaction not regarded as transfer under clause (vicb) or clause (vid) or clause (vu) of section 47.

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Explanation.-For the purposes of this clause, (a) "assessable" shall have the meaning assigned to it in the Explanation 2 to sub-section (Z) of section 50C; (b) "fair market value of a property, other than an immovable property, means the value determine in accordance with the method as may be prescribed; (Rule 11U and 11UA) (c) “jewellery” shall have the meaning assigned to it in the Explanation to sub-clause (1) of clause (14) of section 2

valued as per the provisions contained in Rule 11UA of the I.T.

Rules, 1961 in accordance with the explanation which read as

under:

“Determination of fair market value. 11UA. [(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,— (c) valuation of shares and securities,— (a) the fair market value of quoted shares and securities shall be determined in the following manner, namely,— (i) if the quoted shares and securities are received by way of transaction carried out through any recognized stock exchange, the fair market value of such shares and securities shall be the transaction value as recorded in such stock exchange; (ii) if such quoted shares and securities are received by way of transaction carried out other than through any recognized stock exchange, the fair market value of such shares and securities shall be,— (a) the lowest price of such shares and securities quoted on any recognized stock exchange on the valuation date, and (b) the lowest price of such shares and securities on any recognized stock exchange on a date immediately preceding the valuation date when such shares and securities were traded on such stock exchange, in cases where on the valuation date there is no trading in such shares and securities on any recognized stock exchange;

(b) the fair market value of unquoted equity shares shall be the value, on Page 19 of 26

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the valuation date, of such unquoted equity shares as determined in the following manner, namely:— the fair market value of unquoted equity shares =(A+B+C+D - L)× (PV)/(PE), where, A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet as reduced by,— (i) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and (ii) any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; C = fair market value of shares and securities as determined in the manner provided in this rule; D = the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property; L= book value of liabilities shown in the balance sheet, but not including the following amounts, namely:— (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income- tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PV= the paid up value of such equity shares; PE = total amount of paid up equity share capital as shown in the balance-sheet;] (c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be

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estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of which such valuation. [(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:—

(a) the fair market value of unquoted equity shares =

where, A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:— (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance-sheet; PV = the paid up value of such equity shares; or (b) the fair market value of the unquoted equity shares determined by a merchant banker 2[***] as per the Discounted Free Cash Flow method.]

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A perusal of the aforesaid Rule 11UA of I.T. Rules 1962 shows

that the shares are to be valued in accordance with the last audited

balance sheet which was as on 31.3.2013 relevant to the financial

year 2013 as no balance sheet was drawn up as on 09.04.2014 or

on 31.03.2014. It is pertinent to mention here that as per form 20B

filed by the assessee, the Annual General Meeting for the financial

year ending on 31.03.2014 was conducted on 22.09.2014 before

and the Annual General Meeting for financial year ending

31.03.2013 was conducted on 23.09.2013 and the shares were

purchases on 09.04.2014. Therefore, the question that arises as to

what should be the valuation date in this case.

Securities (P) Ltd vs. ACIT while adjudicating an identical issue has

observed as under:

“12. We do not find any merit in the argument of the ld. counsel for the assessee. A perusal of the Rule 11U(b) as reproduced by CIT(A) at para 5.6 of his order makes it clear that the balance sheet means the balance sheet as drawn up on the balance sheet date which has been audited by the auditor of the company and where the balance sheet on the valuation date has not been drawn up the balance sheet drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the AGM of the shareholders of the company. We find in the instant case, on the date of receipt of the consideration the balance sheet of the assessee company was not drawn up as the same was drawn up only on 31st July, 2014 which is evident from the audited balance sheet filed. Clause (b) and clause (j) of Rule 11UA makes it clear that for computing fair market value of the shares the value of the assets and liabilities as stated in

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ITA Nos 619, 621, 623 and 624 of 2019 K Vijaya Bhaskar Reddy & Other Hyd.

the audited balance sheet immediately prior to the receipt of consideration should be adopted. If, on the date of receipt of the consideration, the balance sheet was not drawn up, then, the balance sheet drawn up as on a date immediately preceding the valuation date should be adopted i.e., the balance sheet of the immediately preceding year should be adopted. We find, in the instant case, on the valuation date i.e., on 31.03.2004, the balance sheet was not drawn up by the auditor as audited financials were drawn up only on 31st July, 2014 and, therefore, we concur with the observation of the ld.CIT(A) that the valuation of assets and liabilities in the balance sheet of the immediately preceding year i.e., 31.03.2013 should have been adopted. Since the valuation done by the assessee was not in accordance with the Rule framed for valuation of unquoted shares i.e., the assessee has not taken the value of assets before introduction of share capital received through fresh allotment and since the Assessing Officer has correctly determined the valuation of the unquoted shares which has been upheld by the CIT(A), therefore, we do not find any infirmity in the order of the CIT(A). Accordingly, the same is upheld and the grounds raised by the assessee are dismissed”.

Since in the instant case the assessee has purchased shares @

Rs.36/- per share on the basis of the last audited balance sheet as

on 31.3.2013 therefore, in our opinion, the order passed by the

learned PCIT disputing the valuation of shares is totally contrary to

the statutory provisions. In our opinion, merely because the director

of the seller company had made a statement, the same cannot be

basis for addition in the hands of the assessee unless the same is

sustainable within the four corners of law. The AO is expected to

examine the applicable provisions during the assessment

proceedings. However, when the provision itself cannot be invoked,

since the Balance Sheet for the year ending on 31.03.2014 was

adopted and approved on 22.09.2014 i.e. after the shares were Page 23 of 26

ITA Nos 619, 621, 623 and 624 of 2019 K Vijaya Bhaskar Reddy & Other Hyd.

purchased, therefore as per the provisions of the I.T.Act, 1961 and

I.T.Rules 1962, the AO was not required to examine the applications

of section 56(2)(vii)(c)(ii) as wrongly recorded by the PCIT. In view of

the above discussion, we are of the considered opinion, that the PCIT

was not justified in disputing the valuation of the shares. We

accordingly set aside the order passed u/s. 263 and the grounds

raised by the assessee challenging the validity of 263 proceedings are

allowed.

proceedings, the grounds challenging the validity of assessment

proceedings u/s. 153A in absence of any incriminating material

becomes academic in nature and therefore are not being adjudicated.

ITA No.621/Hyd/2019 for AY 2015-16 – Shri K.Laxma Reddy

ITA No.622/Hyd/2019 for AY 2015-16 - Shri N.Jaiveer Reddy

ITA No.623/Hyd/2019 for AY 2015-16 - Shri Jaideep Reddy

appeals are identical to grounds of appeal in ITA No.619/Hyd/2019.

We have already decided the issue and the appeal filed by the

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ITA Nos 619, 621, 623 and 624 of 2019 K Vijaya Bhaskar Reddy & Other Hyd.

assessee has been allowed. Following similar reasonings, the above

appeals are allowed.

assessees are allowed.

Order pronounced in the Open Court on 30th August, 2022.

Sd/- Sd/- (LALIET KUMAR) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, dated 30th August, 2022. Vinodan/sps

Copy to:

S.No Addresses 1 K.Vijaya Bhaskar Reddy, K. Laxma Reddy,N. Jaiveer Reddy, N. Jaideep Reddy C/o B. Narsing Rao & Co. C.A. Plot No.554, Road No.92, Jubilee Hills, Hyderabad 500096 2 A.C.I.T. Central Circle 1(1) Hyderabad 3 Pr.CIT (Central Circle)- ,Hyderabad 4 Add.CIT-Central Range-1, Hyderabad 5 DR, ITAT Hyderabad Benches 6 Guard File

By Order

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